Book Value

In theory, Book Value is the sum that shareholders would receive in the event that the firm was liquidated, all of the tangible assets were sold and all of the liabilities were paid.

Book value can be used by investors to gauge whether a stock price is undervalued by comparing it to the firm’s market capitalisation. If a company’s book value is higher than its market cap, then the stock can be considered undervalued and if it’s lesser, the company can be considered overvalued. However, this basic check usually holds true for inventory/asset-intensive businesses. Book Value of IT services companies for instance is mostly on the lower side, because they generate capital out of human resources rather than physical assets, but that doesn’t imply every IT company is forever undervalued.